Highly Profitable but Paying Poorly: Why Is This Today's Comp Philosophy?

We may not all set compensation policy, but we all need to know why that policy exists. Right now, most of us are running blind in this area. So is the business world across the globe, according to an article I ran into this week from The Economist.

"When what comes down doesn't go up," is a great piece of work that all of us should read. I am going to include just a few pieces of information from it that will hopefully act as an enticement to you.

" . . . even before the recession, wages had not been improving as straightforward economics might suggest -- which is to say, in line with productivity. The two moved in tandem following the second world war . . . but have been drifting apart since the 1960s: since 1960 productivity in America has risen by almost 220%, but real wages by less than 100%."

Scholars pose a number of reasons for this and none of them is good news for the U.S. worker -- who, as you can see, is becoming less and less of a good investment:

• Income from capital (e.g. real estate and other financial assets) has been increasing more than income from labor.
• Machines are a) getting cheaper and b) can do more, thus reducing the demand for labor.
• Globalization continues to reduce the demand for "rich-country" labor. (You don't need to be an economist to understand which countries that term refers to!)

That analysis is just the tip of the iceberg in this compelling article, which debunks the commonly held belief in our part of the world that "once unemployment gets below a certain rate, idle labour becomes scarce and competition to hire already employed workers heats up. As firms outbid each other for talent, new workers get better starter salaries and valued staff secure juicy raises."

Seems as though this "rule of thumb" isn't proving true post-recession in the U.S., Britain and Japan -- and that's getting economists nervous. One of the possibilities they consider is that, "It may be that the damage this recession did to the labour market -- the loss of skills and the mismatch between industries where workers have experience and those where there are vacancies -- is being expressed not in the form of long-term unemployment but as lasting low pay." And that would put you and me in a whole new world.

There are lots more interesting topics here like how much employees' growing preference for job flexibility is influencing what competitive pay means. As the writer points out, hiring temporary workers who are easy to fire (and will go away quietly at the end of the contract) takes the worry out of hiring -- at least from an economic standpoint. And may influence the economic footing of all workers, it turns out.

There's a lot to chew on, and even more to learn from. But don't take my word for it. You decide.

Hoping employees haven't noticed? Think again. Everything You Do (in Compensation) Is Communication -- better find out what you've been saying  @ www.everythingiscommunication.com! The convenient website where you can grab our popular eBook. Margaret O'Hanlon, CCP collaborated with Ann Bares and Dan Walter to create this DIY guide to compensation leadership. Margaret is founder and Principal of re:Think Consulting. She brings deep expertise in compensation, career development and communications to the dialog at the Café. Before founding re:Think Consulting, Margaret was a Principal at Towers Watson.

Comments

[Trevor Norcross]

Hi Margaret,
This will be one of the biggest societal issues for the Millennials as they grow up in a global workforce. Since the 1960's the workforce dynamics have changed significantly.

Looking at the macro unemployment numbers is misleading as many are under-employed. You won't see macro wages increase until under-employment is reduced.

I believe we are in for a major shift in workforce expectations.

[Margaret O'Hanlon]

Hi Trevor and thanks for weighing in. Your comments point to the value of this article. They are integrating the various economic, social and political issues involved into a cohesive assessment. They don't forget to count in the numbers of unemployed who have given up, but actually talk about how, when/if they are ready to come back, turn out to be more of the unskilled and therefore underpaid. This pressure wasn't as clear cut in years past.

[E. James (Jim) Brennan]

Looks like the recent warning about this http://www.compensationcafe.com/2015/02/make-me-whole.html was prescient. The imbalanced pattern was clear long ago http://www.compensationcafe.com/2013/04/three-pay-patterns.html and will have profound implications on future workers as summarized here http://www.compensationcafe.com/2014/10/hr-in-2022-1.html.

Remember, you hear it first here at the Compensation Café!

[Chris Dobyns]

In response to the front-end question of, Why Is This Today's [Employer] Comp Philosophy?

The answer is pretty simple: Because they can.

I think most of this labor shift, post-Great Recession, has been known and lightly acknowledged for maybe 5-6 years now. The phenomenons of globalization, plus technology/automation encroachment has whittled away at the labor supply/demand dynamic in the U.S. during that period of time.

Until that labor oversupply is soaked up, wages and salaries can be expected to remain flat - except in some very limited number of areas, where demand outstrips supply. Regrettably, that's not going to raise all wages and salaries.

[Dan Walter]

Two approaches to Comp Philosophy in single sentences:

1. We pay as little as we can without negatively influencing our success as company

2. We pay as much as we can without negatively influencing our success as a company.

Most would argue that they fall under #2, but in fact most use survey data and "best practices" to ensure #1.

I understand the concept of getting something for as cheap as possible. I also understand that paying a bit more isn't always a bad thing.

What I don't understand is why companies expect a cheap workforce will also be an engaged and happy workforce.

[Margaret O'Hanlon]

The thing is, Chris, they're thinking that wages may remain flat no matter what's going on with labor supply in the rich-countries.

As Dan's pointing out, most companies use "market practices" as a comfortable euphemism for let's keep the cost of labor as low as possible -- but I think it's often because of no greater insight than that's the way it's being done.

The thing is, as you brought up, the flat salary status quo (sort of like Flat Albert who finds himself everywhere) now makes it easy for no thought to go into budget discussions. (Everybody's blaming it on everyone and everything else.)

But we could influence the discussion to at least examine what's going on and it's fit for our company,if we took a shot at it.

[E. James (Jim) Brennan]

"More of the same" seems to be the constant refrain. Don't disagree with anything said earlier, but note that SSDD appears to be the rule.

Those who pay low don't dramatically increase their competitive pay structures. They simply cite the proper surveys to support their relative maintenance of the status quo. Those who pay high do exactly the same. No one finds any need to alter their total reward strategies or their tactical practices.

A comp pro can always find a survey to support any position. That's what keeps us employed, for those who still have a job. It remains comfortable for those at the top.